Casella Waste Systems sees decline in operating income from its recycling segment

Casella Waste Systems sees decline in operating income from its recycling segment

Lower commodity pricing and volumes arising from China’s National Sword offset overall annual revenue growth.

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March 2, 2018
Edited by DeAnne Toto
Financial International Recycling News Legislation & Regulations Municipal / IC&I

Rutland, Vermont-based Casella Waste Systems Inc., a regional solid waste, recycling and resource management services company, has reported revenue increases in the fourth quarter of 2017 and for the full year, which ended Dec. 31, 2017. In its 2018 guidance, Casella Waste predicts further revenue gains.

For the fourth quarter and full year, Casella has reported:

  • revenue of $151.2 million, up $7.4 million, or 5.2 percent, from the same period in 2016 and revenue of $599.3 million, up $34.3 million, or 6.1 percent, from fiscal 2016;
  • net income of $20 million as compared with a net loss of $12 million for the same period in 2016 and a net loss of $21.8 million compared with a net loss $(6.9) million in fiscal 2016;
  • adjusted net income attributable to common stockholders of $4.6 million compared with $1.9 million for the same period in 2016 and $28.7 million compared with $7.8 million in fiscal 2016;
  • adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $30.2 million, up $800,000, or 2.8 percent, from the same period in 2016 and $129 million, an increase of $8.4 million, or 7 percent, from fiscal 2016;
  • net cash provided by operating activities of $107.5 million for the fiscal year, up $27.1 million, or 33.7 percent, from fiscal 2016; and
  • normalized free cash flow of $38.8 million for the fiscal year, up $11.7 million, or 43.1 percent, from fiscal 2016.

On Feb. 26, 2018, Standard & Poor's increased the company’s corporate credit rating from “B” to “B+” with a positive outlook.

"We had a strong operational quarter and a great year, as we continued to execute well against our key strategies," says John W. Casella, chairman and CEO of Casella Waste Systems. "We remain focused on creating shareholder value through increasing landfill returns, improving collection profitability, creating incremental value through resource solutions, driving general and administrative efficiencies and strong capital discipline."

He adds that the progress the company has made is visible in Casella Waste’s financial results in the fourth quarter. "Our disciplined solid waste pricing programs continued to add value, with landfill pricing up 3.6 percent and collection pricing up 3.7 percent. This strong pricing was coupled with 2 percent solid waste volume growth, mainly driven by 4.8 percent growth in landfill volumes as we continued to source new volumes in the tightening northeastern disposal markets and 1.2 percent solid waste revenue growth from acquisitions."

Casella says the company has set a goal to grow revenue by $20 million to $40 million per year through acquisition or development activity for the next three years. “We are off to a great start with this strategy, with roughly $18 million of acquired revenues over the last two months. During the fourth quarter, we completed a small tuck-in hauling acquisition, and in early January 2018 we completed the acquisition of an integrated solid waste company in western Massachusetts that provides us with a new market entrance and a strategic truck- and rail-served transfer station that will enable us to direct additional waste volumes to our landfills in New York and Pennsylvania,” he says. “Our acquisition pipeline remains robust, and we believe that investing a portion of our excess cash flows to grow our business will create additional shareholder returns through higher cash flow growth rates driven by new revenue streams, internalization to our disposal facilities and cost synergies."

Revenue growth in the fourth quarter was driven primarily by robust collection and disposal pricing, strong solid waste volumes, the roll-over impact from acquisitions and higher volumes in the customer solutions line-of-business, partially offset by lower recycling commodity pricing and volumes, the company says.

Net income attributable to common stockholders was $20 million, or 46 cents per diluted common share, an increase of $32 million for the fourth quarter as compared with net loss attributable to common stockholders of $12 million, or 29 cents per diluted common share, for the same period in 2016.

Operating income was $9.9 million for the fourth quarter, down $100,000 from the same period in 2016, whereas adjusted operating income was $10.3 million for the fourth quarter, down $600,000 from the same period in 2016.

"During the fourth quarter, operating income was down approximately $2 million year over year in our recycling business," Casella says.  "This decline was mainly driven by China's National Sword program, which imposed strict new contamination standards for recycled commodities and significantly reduced global demand for paper and cardboard products. This has led to mixed paper price declines of approximately 80 percent from July 2017 to January 2018, while at the same time our operating costs are up as we have slowed sorting lines and increased labor to produce higher quality end products.”

He adds, “Our mature risk mitigation programs, such as the Sustainability Recycling Adjustment fee, have worked well to offset the majority of commodity price declines during the quarter, and we expect these programs to continue to significantly reduce our commodity risk exposure."

The increase in yearly revenue reflects the impact of robust collection, disposal and recycling commodity pricing, higher volumes in the company's collection, disposal and customer solutions lines-of-business and the roll-over impact from acquisitions, partially offset by lower organics volumes, Casella Waste says.

Net loss attributable to common stockholders was $21.8 million, or 52 cents per diluted common share, a decrease of $15 million for the fiscal year compared with net loss attributable to common stockholders of $6.8 million, or 17 cents per diluted common share, for fiscal 2016.

Adjusted net income attributable to common stockholders was $28.7 million, or 67 cents of adjusted diluted earnings per common share, for the fiscal year, compared with adjusted net income attributable to common stockholders of $7.8 million, or 19 cents of adjusted diluted earnings per common share, for fiscal 2016.

Operating loss was $12.6 million for the fiscal year, down $57.5 million from operating income of $44.9 million in fiscal 2016, whereas adjusted operating income was $52.8 million for the fiscal year, up $6.9 million from fiscal 2016.

"Our fiscal year 2018 budget is on track with the fiscal year 2021 strategic plan that we first introduced in August 2017 and reflects continued execution of our key strategies with the goal of driving additional shareholder value," Casella said. "We remain cautious about near-term headwinds from the recycling business; however, we believe that our mature risk mitigation programs will continue to offset the vast majority of commodity price declines and current market conditions are contemplated in our fiscal year 2018 guidance."

The company provided guidance for the fiscal year ending Dec. 31, 2018, by estimating results in the following ranges:

  • revenue between $618 million and $628 million (compared with $599.3 million in fiscal 2017);
  • adjusted EBITDA between $135 million and $139 million (compared with $129 million in fiscal 2017); and
  • normalized free cash flow of between $42 million and $46 million (compared with $38.8 million in fiscal 2017).

A number of assumptions are built into the company’s outlook:

  • Overall, Casella Waste says it expects revenue growth of between 4.6 percent and 6.3 percent in fiscal 2018. However, the company says it expects that the adoption of the new revenue recognition standard to lower revenue by approximately 1.5 percent. Given this change, Casella Waste expects revenue growth of between 3.1 percent and 4.8 percent in fiscal 2018.
  • In the solid waste business, it predicts revenue growth of between 6 percent and 7.5 percent, with price growth from 2.5 percent to 3.5 percent, volume growth from 0.5 percent to 1 percent, and 3 percent growth from acquisitions already completed.
  • In the recycling business, overall revenue declines of between 15 percent and 20 percent are expected, driven by lower commodity prices, lower volumes and changes in revenue recognition, partially offset by higher processing fees.
  • In the Other segment, overall revenue growth of approximately 5 percent is expected, with growth in the industrial segment for the Customer Solutions group and higher volumes in the Organics group, the company says.
  • The budget includes the roll-over impact of acquisitions completed during fiscal 2017 and in early fiscal 2018 but does not include any acquisitions that have not yet been completed.
  • The company says it expects capital expenditures of approximately $65 million and payments on operating leases of approximately $7.5 million.
  • Casella Waste also assumes no material changes in the regional economy from the last 12 months.